On Wednesday, the UK reported some macroeconomic data. However, statistics turned out to be rather downbeat. Home prices in the country rose less than expected. Meanwhile, the final GDP estimate for the UK improved slightly. The economy contracted by 9.8% in 2020, slightly revised from the first estimate of a 9.9% decline. Nevertheless, it was the worst annual performance for more than 300 years. In the fourth quarter, the British economy plummeted by 7.3% on an annual basis but expanded by 1.3% on quarter.
However, market response to Britain's statistics remained subdued as traders considered this data irrelevant. According to analysts, these figures are unlikely to reflect the conditions in the UK economy in the near future when it begins to reopen. Market participants prefer to focus on positive news, namely on gradual lifting of restrictions in the country since April. Shops as well as outdoor public places and venues will open.
Buyers took the lead, and the pound sterling resumed its bullish run, paring some of its recent losses. In general, March was rather challenging for the British pound as its rate collapsed against the US dollar. A month ago, the pound/dollar pair was testing the 1.4200 mark, while today the quotes are struggling for the 1.3800 level.
This decline in the sterling may be short-term. Given higher expectations for a faster recovery in the UK economy, the British pound now looks undervalued.
An upward trend in the energy market can also cheer up buyers of the pound/dollar pair. Crude oil remains in a tight correlation with the British currency, so there is a chance to see an increase in long positions. The next meeting of OPEC+ is scheduled for Thursday. There are rumors that Saudi Arabia is going to extend oil production cuts into May and June. This is a good signal for oil and, therefore, for the pound sterling.
However, the quotes may come under downward pressure from the US Treasury auction. Nearly $148.4 billion of notes are due to be auctioned, which is the largest withdrawal of dollar liquidity from the financial system in the current quarter. This factor may drag the US dollar up.
Despite the rebound, the pound/dollar pair is still trading under the control of bears. In case of stronger negative pressure, the pound sterling may further decline to the levels of 1.3675 and 1.3580. If the price breaks through the resistance level of 1.3835, this scenario will be cancelled and the pair is likely to make an upward correction. Meanwhile, the bullish outlook has yet to be confirmed, so buyers should be careful.
According to analysts, the long-term forecast looks positive. UBS revised its outlook for the pound sterling upwards. The banking strategists attribute this to the fact that the British currency will be supported by a faster global economic recovery, renewed investment in the UK, and demand for risk. The pound usually reacts positively to the global economic growth.
They also believe that the Fed will not tighten monetary policy, while the British economic recovery will allow the Bank of England to stick to moderately tight policy.
In the coming months, the British pound is likely to continue gaining in value against the US dollar. According to estimates, the pound/dollar pair will be able to advance to 1.4500 in September and 1.4900 in December. As for the next year, analysts expect the price to rise above 1.5000.
